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Falling on Deaf Ears? Wall Street Kneels at the Altar of the SEC

A number of executives from Wall Street took to the SEC on November 30th to present the regulator with a 63-page proposal arguing for the approval of bitcoin ETFs. SEC Chairman Jay Clayton’s remarks at the Consensus Invest Conference in New York indicate their appeal may have fallen of deaf ears.

U.S. Securities and Exchange Commission employees present at the Friday meeting included members of the Division of Trading and Markets, the Division of Corporation Finance, the Office of General Counsel, and the Division of Economic and Risk Analysis (some joining by telephone).

This effort follows a crypto thought leader descent on Capitol Hill in September, urging lawmakers to legislate or forever hold their peace when innovation departs for more conducive climates given the SEC’s confused, confusing, and painstakingly slow progress on the question of how to treat digital assets.

The approach to Congress was an attempt to bypass the SEC altogether. It seems the most formidable ETF product creators realize engagement with the regulator is, in the end, a necessary evil.

A Different Take or the Same Arguments Peddled?

The same arguments as VanEck has made before were presented to the staffers present. However, the presentation made a couple of interesting points and observations, some benefitting from about a year’s worth of data since bitcoin futures were first traded on the Cboe exchange on December 10th, 2017.

Firstly, the group argued that the SEC has approved ETF products that lack price discovery and transparency mechanisms the body appears to be demanding of bitcoin. The report cites the Breakwave Dry Bulk Shipping ETF, a fund designed to offer investors exposure to daily changes in the price of dry bulk freight futures.

It is a rather obscure fund of futures contracts for dry bulk freight shipping costs. The group argued that the commission noted at the time of the (successful) application:

“The Exchange has represented that the Freight Futures trade on well-established, regulated markets that are members of the ISG. The Commission finds that the Exchange will be able to share surveillance information with a significant regulated market for trading futures on dry bulk freight.”

VanEck and co representatives argued that the Approval Order failed to include further discussion on how well regulated the markets that the listing exchange shared surveillance information with were. They also criticized the body for failing to question whether the exchange had put in place additional means to “prevent fraudulent and manipulative acts and practices”.

The SEC’s most common stated objections to crypto ETFs have always been their propensity for market manipulation and the lack of regulation surrounding price surveillance partners.

Yet, the VanEck, SolidX, Cboe crack team’s 12-page PowerPoint presentation to the counsel to the incoming commissioner Elad Roisman in October made some equally pointed remarks that appear to have done them few favors:

“As issuers, we are concerned the SEC staff have created a moving target in their use of the word “significant”… The Staff have never provided guidance as to what “significant” means, enabling them to move the goal post indefinitely.”

Perhaps frustration is setting in while there’s money to be made.

Gold, Silver, Bitcoin… Nothing Crude About It

Citing the role that futures markets play in spot price discovery, the team now has almost a year’s worth of Cboe and CME data proving that bitcoin futures have not, in fact, impacted bitcoin spot prices, and that bitcoin and futures prices are cointegrated, indicating a well-functioning market.

Futures prices also rapidly revert to spot prices as expiry dates approach–again, an indication of well-functioning derivatives markets. Differentiating the market from oil futures, the group likened bitcoin to gold and silver insofar as it tends to trade slightly differently to normal commodities, as it is deemed a “money substitute”.

Evidence of Manipulation More Important Than Potential for Manipulation for Clayton

Given dry bulk freight futures ETFs were approved despite the potential for fraud and manipulation, Clayton is clearly more concerned about markets where manipulation does take place than those where it could.

His latest remarks appear to support the view that he is more concerned with manipulation than the potential for it in the future:

“What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation. It’s an issue that needs to be addressed before I would be comfortable.”

Have your say. Are bitcoin ETFs off-the-table for the SEC, at least for the time being?